Industrial firms experience a strong tension between high demands to outsource manufacturing to low-cost regions and the need to integrate and co-locate key competencies in product development chains. The chapter explains this tension as a dynamic balance between knowledge integration (KI) requirements and capabilities. Three themes are discussed, illustrated by survey data and case studies. First, the chapter argues that parallel investments in manufacturing capability are valuable for meeting KI requirements derived from outsourcing manufacturing. Second, the analysis demonstrates how different kinds of outsourcing strategies shape the KI challenges. Third, the chapter shows how KI challenges turn up as hidden costs, performance trade-offs, or deteriorated cost reduction capability. The chapter claims that the lack of analysis of KI challenges is one explanation why previous studies on outsourcing effects have shown contradictory results. The chapter ends by suggesting the notion of manufacturing absorptive capacity for understanding KI challenges when outsourcing manufacturing.